It's time to worry about the housing market again
financialsamurai.com
financialsamurai.com
I'd argue that this makes for a bad public policy environment. With such a high levels of concentrated investment in a single asset class political manipulation of that asset class isn't just tempting, it's practically a political necessity. What the voters demand is impossible to sustain forever (monotonically increasing nominal prices and above the rate of general inflation growth over every five year period), but with such high political pressure politicians try anyway.
https://www.marketwatch.com/story/housing-market-has-hit-a-s...
The present feedback loop is straightforward: CPI is an average of consumer goods and the price of housing. Due to technological and economic progress, the costs of manufactured goods are always dropping. To maintain the Fed's stated goal of continual inflation, new money must be injected into the housing market to compensate.
(The same goes for anything else that can be financialized, eg cars)
Timing the downturn is usually not possible.
What's the phrase? Time in the market beats timing the market.
A lot of people have missed out on big market gains over the past few years because they wanted to protect themselves from a recession. It's a poor long-term investing strategy and it's based purely on guesswork, unless you own a time machine.
In 08 the S&P tanked 50%+, while housing (measured by Case-Shiller national home price) only dropped around 18%. In desirable cities the housing correction was even smaller.
In any case, bull markets don't die of old age, they die from recessions.
I think we will more likely enter a dystopian phase to squeeze out more money from the workforce.
The most obvious tool for juicing margins in the next two years is in reducing costs (headcount or salaries)
I’m still recovering after tapping into my 6 mo emergency fund to make the down payment. I think I need to move to a more aggressive E fund regeneration strategy. The article states having ~20%~ 10% of home value in liquid cash; my ~6~ 3 month E fund is about there.
I haven’t learned how to check the indicators to tell if the economy is about to go through deleveraging yet. I don’t know if I’m seeing more attention to this type of article now that I own a home or if the presence of these articles are in indication something bad is about to happen.
I guess the future will tell. I’ll tighten my belt much more and get that E fund back up.
I wasn’t working in 2008 during the recession; I’ll prepare just in case I lose my job. No new debt.
Edit: article recommends 10% the value of your home in cash, not 20%, to get through a downturn. Updated this response.
There were tons of short sales during the last recession because people could not afford their mortgage payments and their houses were worth less than they owed. It's a very bad situation to be in, and if you lose your job you might have no choice.
Another less bad situation is that you might need to turn down better career opportunities in other cities because you aren't able to sell your house.
Being in that kind of a jam really diminishes your control over your future.
If the house price stays the same this still ends up costing you roughly 6%.
If the house is underwater (which the OP discussed) then you literally cannot sell without making up the difference.* Meaning, YOU PAY someone for them to take the house. That is a horrible situation. Also, that means you have less than 0 left to purchase the next home.
But yeah being stuck in the same house because it lost value wouldn't be good.
Or they lost their jobs because of the recession.
Well, 5 years later rates have gone up to where they can't afford the new payments, so end up losing the house.
Good point. The problem would arise if I lost my job, had to broaden the cities I apply to jobs for and I had to sell my house to move to a new city.
Presumably, the market would contract forcing employers to downsize. My employer would downsize and I would get caught up in it. I would then have to choose to keep the house but limit my job prospects or cast a wider net by applying in other cities. At that point, I would have to realize a loss on my house, potentially tapping into my already constrained finances.
However; best case scenario I wouldn't lose my job and I get to weather a deleveraging in the house I just bought.
That’s not always possible. A great example is Vancouver right now. A 2 bedroom condo is around $600k. That’s almost $5000k when you include mortgage, insurance, property taxes and opportunity cost of your down payment.
Units like that usually rent for $3000 tops.
There is a ton of speculation happening in the hot markets so people will take the monthly loss in rent hoping that the equity gain will offset it.
If you need a frame of reference, check what happened to marriott during the 2008 crash (fell by almost 2/3).
The issue mentioned in the article is: What if you need to sell? Like what if you lost your job, found a new one but in a completely new city, far away from where you bought your house: will you be able with the new salary to pay for both a rental near your new work, and continue paying the mortgage on your original house?
> most people don't change homes very often, so the value of the home shouldn't have much impact on your life until later.
This is the assumption that people might disagree with. Does it make sense?
it says >=10%. which taken as some absolute rule, is absurd. if you're not moving in the next 10 years, the current value of your house is meaningless.
You're right, the article does say 10%, not 20%. Thanks for the correction!
Don't you mean your house won't be worth the equity you put in? Assuming you put 20% down, your debt is 80%. I would think it's pretty tough for a house to lose more than 20% of it's value.
Also, if the house isn't worth the debt you took on, that's technically the debt holder's problem not yours.
Yes, June 2006 to April 2009 was pretty tough on the US housing market!
"if the house isn't worth the debt you took on, that's technically the debt holder's problem not yours"
Right, unless you care about having zero net worth and/or not having a roof over your head.
The slump has already started.
And it should be noted, this article is from February 2018.
https://fred.stlouisfed.org/series/SFXRSA is bit lagged (most recent data is july) but doesn't seem down?
> The reason no one wants to reduce rent in the Bay is because of rent control.
Is rent control common in the south bay? AFAICT, there's only Mountain View which passed by ballot initiative in 2016.
While Californians are aligned on many things, in some ways your perspective on the housing situation depends a lot on whether you own a home or don’t.
If things stay their course I plan on renting indefinitely and moving to another state where prices are relatively affordable for my family.
Having grown up in the Bay Area, it’s a little disconcerting that I can’t afford to settle down here after moving back after college.
That's more than I pay for a year for a 2bd apartment in downtown Phoenix...